Tuesday, March 20, 2012

Iran is now marginalized by increased OPEC production

Iran as an oil producer is becoming increasingly marginalized. Libya is finally bringing its production online and the Saudis are pumping at record highs.

Reuters: Exports from Saudi Arabia rose by 143,000 barrels per day (bpd) in January, as the world's leading crude seller boosted sales to the United States. The kingdom pledged to work individually and with other Gulf countries to return oil prices to what it called "fair" levels.

"Up until now, Saudi Arabia has not done much to ease the oil prices ... We have however to consider the risk that the combination of the Vela fixtures and the Saudi cabinet statement could signal a change of policy," said Olivier Jakobs of Petromatrix in a note.

Libya is also ramping up production as it plans to export almost 1.4 million bpd of crude oil in April, exceeding deliveries in February 2011 before the uprising that ousted Muammar Gaddafi.

This boost in global supply has helped easedconcerns about the standoff between the West and Iran over Tehran's nuclear program, which has lifted oil prices this year and kept oil markets on edge.

China and India, being the only major buyers of oil from Iran, will squeeze Iran on pricing, forcing it to sell substantially below market. Once that happens (the ban on Iranian oil starts July 1), China and India will reduce purchases from OPEC. That combined with lower expectations for global GDP growth should cap the oil price rally. Oil is selling off sharply this morning on the news of this increased production.

Having said this, with Iran shut out, oil producers' spare capacity remains extremely tight. An unexpected global GDP acceleration or more likely a geopolitical disruption, could create a violent spike in prices.